Capital Theory (Sans Capital?)

This piece from the Financial Times reveals the intricate contortions economic journalists are facing in a world of overwhelming state presence in the basic functioning of the system, and as government indebtedness replaces private debt that was enabled by government neglect in the first place. Some gems:

This is the biggest conundrum for regulators and government: allow support for tier one and it arguably is not capital after all–but let it fail and see another potential avenue for future bank capital raising close down.

Eventually, enough bank rescues will lead to a point where a government faces a choice between the survival of its country’s banks and its own ability to borrow.

The fate of hundreds of billions of pounds, dollars and euros of bank capital presents a tricky flashpoint for pension and insurance funds, for banks themselves and for governments.

The big question for investors is: where exactly does government support stop when it comes to the liabilities of a failing bank?

For governments and banks: How much pain can pension funds and insurers take and how might they protest against it?

The answers to these questions affect not only banks’ stability and access to capital, but also as some would have it the ability of credit markets to recover and banks and companies to fund themselves.

The fear of losses is real: late last week, insurance stocks globallly were hit hard by the potential for losses on bank capital.

In the UK, these questions are especially important, which is why there have been meetings involving all three interest groups, although these have failed to reach any definite answers.

The 15-20 biggest institutional investors who would get burnt by losses on bank capital instruments are the very same audience that the banks hope will buy large chunks of their senior bonds – and that the government hopes will help support its heavy gilt issuance.